5 tips on how to increase borrowing capacity

Whether you’re a first home buyer or an aspiring investment property mogul, getting your foot in the door of the Australian property market requires a considerable financial contribution.

More often than not this means taking out a home loan so you can finance your real estate purchase. However, if you have existing debts or maybe aren’t saving as much as you could, lenders won’t be as willing to loan you as much as you might like, or need.

To help give you a leg-up on your property journey, we’ve created a list of 5 tips you can use to spruce up your credit file and increase your borrowing capacity.

1. Budget, for real this time
2. Quitting buy now, pay later services
3. Pay down your debts
4. Trimming the fat
5. Savings apps and plans

Your borrowing power is the all-important factor when buying property. More borrowing power means more choice when it comes to home loans and deciding where, what and when you’ll purchase.

But what is borrowing power exactly? Also called borrowing capacity, your borrowing power is the amount of money a bank or financial institution is willing to lend you.

To determine this amount, the lender will ask for your financial records including income statements, credit card statements and any documents about loans or savings you have. After taking a careful look at your credit history, income and how much money you need to service debt or other financial commitments such as personal loans or a car loan, the lender will calculate how much is left over for further loan repayments.

So how can you increase your borrowing power? There are plenty of ways to make a difference to the amount a bank or other Australian credit licence-holder will lend you. In as little as six months you can make a huge change to your borrowing capacity and take a step closer to your dream home.

Here, we outline the ways you can strengthen that borrowing muscle. Some may involve a concentrated effort, while others may only mean minor changes. But all of them will result in broader options when it comes time to search for your property.

There are plenty of ways you can increase your borrowing capacity and look appealing to lenders

Budget, for real this time

You’ve no doubt been told about the benefits of budgeting. And chances are, you’ve written up a budget before. But have you stuck to it? Is it a budget you’ve adjusted over time to keep pace with changes in your lifestyle and circumstances?

Budgeting is the single best way to trim your expenses and boost your savings. But a budget means nothing if it’s ignored or used selectively.

Make a strict rule to keep your budget as detailed as possible – take account of how much money is coming in and how much is going out each week or month, whatever suits you best. Include ongoing expenses such as gym memberships, union fees, subscriptions and loan repayments.

It’s tempting to underestimate your expenses to exaggerate your income, especially when it comes to how much you spend on personal items and entertainment. Not accounting for Friday night drinks, that wedding that’s coming up next month and family birthdays can leave holes in your budget.

Make a promise to yourself to be as accurate as possible. After the first month or so of following your budget, analyse the figures that need revising. It’s fine to leave room for flexibility because we all know life doesn’t follow a spreadsheet.

However, a tight budget will give you better insights into where you can cut back and ultimately how much you can save.

Budget tips summarised

Create a budget template that includes:

• Weekly costs: grocery shopping, transportation, petrol
• Fortnightly costs: rent/ mortgage, insurance
• Monthly costs: electricity, gas, water, medication, subscriptions (more on the latter below), phone and internet bills
• Annual costs: car registration, rates, travel (the type of travel you absolutely must do, usually concerns immediate family members)
• Accidental costs: car repairs, laptop and mobile phone repairs, etc. (more on these later) “

Split your budget into weekly, fortnightly, monthly, annual and accidental costs.

Quitting buy now, pay later services

If ever there was a modern day temptation for consumers, it’s buy now, pay later services. They may seem like they magically conjure up instant money to buy whatever products you’re eyeing off, but they can result in costly late fees.

According to Choice, most users of buy now, pay later services are aged 18 to 34, and two out of five earn less than $40,000 a year. And more than half of buy now, pay later users are spending more than they would without the services, and one in six can’t make payments on time.

Buy now, pay later services are becoming ubiquitous – you can even use them to pay for your dental treatments. So it will take self-discipline to block them out, especially for those who have grown accustomed to using them.

Knowing how easy it can be to get in over your head, it’s best to steer clear of these services especially while you’re saving.

Quitting buy now, pay later services summarised

• See if you’re using any of these or similar apps

– AfterPay

– ZipPay,

– LazyPay

– Payright

Concentrate on paying those debts off and closing your accounts.

• Ignore any promotional offers with these messages:

–  “buy now, pay later”, or

–  “12 / 24 / 36 months interest free”

Pay down your debts

Rule number one of saving: reduce your debt. If you have credit card debt, personal or car loans, work out how much you can afford to repay while still allowing enough for your living expenses. Keep a buffer amount that allows for unplanned events such as your car needing repairs or your rent increasing.

Examine your secured and unsecured debts and identify which one is charging the higher interest rate. This is the debt that you need to prioritize. Attack it with repayments higher than the minimum amount so you can pay off the debt faster. This way, you’ll avoid those nasty extra interest or late fees that add up so quickly.

Lowering your debt is key to increasing your borrowing power. Lenders will take a good look at your debts (including credit card limits) and how you have been repaying them to calculate how much they can loan you. With lower debts, you are more likely to be able to borrow more.

Paying down debts summarised

Ask yourself:

• On which debt am I paying the greatest interest rate? That’s the one you should pay off first and as quickly as you can; you can find the rate you’re paying on your statement or by requesting this information directly from the bank / lending supplier.
• What’s the maximum amount per week I can commit to pay this off? Remember, that the interest is charged to your debt on daily basis so you should put any extra cash into paying this off.
• What can I cut out to free up extra expenses that will be able to be out towards this debt?Paying down other debts leaves more capacity for borrowing.

  Trimming the fat

  There are countless ways to slash your expenses and speed up your savings. If you are focused on your savings goals, you can use these tips to really make a difference to your borrowing power. Not to mention that greater savings for a larger deposit can allow a mortgage broker to negotiate a lower interest rate on your behalf. Many of these changes only need to be temporary whilst you are on your savings journey, some short-term pain can lead to some long-term gain!

  Pick and choose from the super savers below:

  • Use public transport and avoid the high car running costs of petrol, maintenance and insurance. Best of all, no parking fees or hassles!
  • Stop paying gym fees and take exercise into your hands. Make use of local walking, running and cycling paths. Ask your friends if they would like to work out with you and in rainy weather, find some YouTube workout clips that suit you for an indoor session.
  • Move back home. This may not be an option for everyone, but if you can move in with your family for a short period to save money, it’s highly likely to be worthwhile from a savings perspective.
  • Share your home with others or move into a flat-share. Letting out rooms in your house or moving in with others is a great way to lower your rent and living expenses. Again, this may not be an option for everyone, especially families.
  • Shop around on your electricity and gas. Find the best deal on the Australian Government’s Energy Made Easy website.
  • Say goodbye to your subscriptions. Monthly subscriptions come in all varieties: TV, online newspapers, food plans. Getting rid of them may cause you some heartache, but in the short term it could save some valuable cash.

  Savings apps and plans

  There’s no shortage of online savings calculators, apps and plans to help you build your borrowing power. Moneysmart is an independent source of information and a great place to get started. Try their Savings Goals Calculator and Budget Planner.

  Apps-wise, there’s the Pocketbook Personal Finance Expense Tracker, which helps you track and sort most of your transactions, and TrackMySPEND by the Australian Securities and Investments Commission, a free app recommended for people who struggle with budgeting. There’s also MoneyBrilliant, which connects your finances through your bank accounts, credit cards, loans and even superannuation, and Spendee, which features Shared wallets for couples, families or roommates with shared expenses and easy to follow graphics that track your account balances.

  You may also want to try following the advice of Scott Pape, also known as the Barefoot Investor, whose books are available in public libraries. Online, check out tips at MrMoneyMoustache and if you like listening to podcasts, try the ABC’s The Pineapple Project.